Chart of the Month: Is it Time to Start Worrying about the Housing Market Again?

by
Tracey M. Manzi, CFA
| 23 August 2019

Source: Federal Reserve Bank of St. Louis, Author's Calculations

Market Observations

For generations, home ownership has been an important way to build wealth. However, climbing house prices and stagnating wages are making it challenging for new home buyers to enter the market and fueling concerns about housing affordability, especially for low- and moderate-income households. While the Fed’s recent decision to lower interest rates should help on the margin, saving for a down payment has become increasingly more difficult as house prices continue to rise faster than incomes. A good rule of thumb long used by realtors and financial planners suggests that housing costs should not exceed more than three times one’s income. But today, housing costs in many cities around the nation have become staggeringly more expensive than that. The median sales price of an existing single-family home is currently five times greater than the median household income. This is notable because the house price-to-income gap is now wider than the gap that existed in the months leading up to the financial crisis. And, for people living in the coastal cities in California and along the New York-Boston-Washington corridor, the gap is significantly wider than the national averages. With house prices outpacing incomes so aggressively and the market bracing for an economic slowdown, it can cause people to wonder if it is time to start worrying about the housing market again.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.